Research Highlights

Reading the Tea Leaves on Corporate Performance

— October 9, 2014

...our study shows that analyst interest is a novel and early indicator of future firm fundamentals and capital market consequences.

One way to peer into the future of a public company’s fundamentals, capital market activities and stock returns is to monitor the participation of sell-side analysts in the firm’s quarterly earnings conference calls, according to new research by NYU Stern Assistant Accounting Professor Michael J. Jung.

In “Analyst Interest as an Early Indicator of Firm Fundamentals and Stock Return,” forthcoming in The Accounting Review, Professor Jung and co-authors M.H. Franco Wong of INSEAD and X. Frank Zhang of Yale describe their investigation into an observable aspect of analysts’ due diligence prior to their decision to initiate coverage of a firm's stock. Their analysis signaled that analyst behavior can provide investors with an early indicator of a firm's fundamental changes that are not yet reflected in its financial statements.

The authors’ study of conference call transcripts from 2002 to 2009 found that when equity sell-side analysts who regularly cover a company stop participating in the company’s earnings calls, they are likely to stop covering the company. Such a noticeable decrease in analyst interest presaged a decline in sales and earnings figures and, over the next three months, a decrease in stock and hedge portfolio returns.

Conversely, when analysts who haven’t previously covered a company join its earnings calls and actively participate, this uptick in analyst interest and probable future coverage signifies improved future corporate performance, as well as an increase in stock and hedge returns.

“Overall,” said Professor Jung, “our study shows that analyst interest is a novel and early indicator of future firm fundamentals and capital market consequences.” He added that the study highlights the role that analysts play in capital markets.